Young Americans Feel Cash-Strapped

Many Americans under the age of 35 face financial hardships much harsher than those encountered by their baby boomer parents. For many, it's harder than ever to make financial headway.

In her new book, "Strapped: Why America's 20- and 30-Somethings Can't Get Ahead" (Doubleday), author Tamara Draut takes a hard look at why so many adults under 35 struggle for financial independence. Draut says astronomical student debts, depressed wages, rising health care costs and soaring property values are just a few reasons an entire generation of young people cannot overcome crippling financial situations.

The book profiles a wide swath of people to serve as examples, and Draut works to connect the dots between various social and economic trends and government policies over the past 30 years.

Focusing closely on the student loan burden, she suggests a program that would shift federal financial aid away from a loan structure to a grant structure. She also lays out ideas for a career-ladder program that would create apprenticeships in fields such as health and teaching, and a "spread-the-wealth" incentive plan -- a federally matched savings program geared toward youngsters and low-income families that would help them save for down payments on housing.

A few numbers cited in the book:

Higher and Higher Education

Inflation-adjusted tuition at public universities has nearly tripled since 1980. Thirty years ago, the average cost of attending a private college was $12,837 a year, in inflation-adjusted dollars. Today the average cost of attending a public university is $11,354, which means the financial burden of paying for a state college today equals the burden of paying for a private college in the 1970s.

Paycheck Paralysis

In 1972, the typical 25- to 34-year-old male with a high school diploma earned just over $42,000, in inflation-adjusted dollars. Today men in this age group earn just over $29,000.

Generation Debt

The rise in credit card debt combined with massive student loan debt means that 25 cents of every dollar in income goes to paying off debt. Because only about half of those in this age group own homes, for many that 25 cents all goes to nonmortgage debt: primarily student loans, car loans and credit cards.

High Cost of Putting a Roof Over Your Head

The Northeast and the West, along with other major metro areas like Chicago, are fast becoming middle-class free zones: Median home prices in Sacramento, Calif., doubled to $258,000 between 1997 and 2002; in Seattle, they reached $260,000, an increase of 42 percent; in Boston, they hit $413,500.

Family and Work Today 61 percent of mothers with children under the age of 3 are in the workforce -- up from 40 percent in the 1960s. The average cost of child care is more than $6,000 per year, per child.

Draut, the director of the Economic Opportunity Program at Demos, a national think tank headquartered in New York, says she hopes her ideas, combined with 20- and 30-somethings becoming more engaged politically, will help get "generation broke" out of debt and back on the road to financial freedom.

Following is a an excerpt from the first chapter of Tamara Draut's "Strapped: Why America's 20- and 30- Somethings Can't Get Ahead"

CHAPTER ONE

Higher and Higher Education

Renee, a white 26-year-old, grew up in St. Paul, Minnesota. Her parents wanted nothing more than to send her to a four-year college when she graduated from high school, but unfortunately, it was priced out of reach. Instead, Renee began taking business classes at a nearby community college that specialized in business training and got a full-time job. She worked during the day and took classes at night.

Some time later, Renee accepted a new job at a nearby printing company. A nice increase in pay was the upside; working the midnight shift was the considerable downside. Suddenly, balancing school and work became a lot more difficult. Renee would work until 8 A.M., sleep in the afternoon, and go to school at night. Eventually, racked with exhaustion, financially stressed out, and supporting an unemployed boyfriend, Renee dropped out of school. Money played a big role in her decision. She had already taken out student loans and burned through a small inheritance from her grandfather. Already $4,500 in the hole with student loans, Renee didn't want to sink any further into debt.

It is now four years later and Renee is still making loan payments. She anticipates it will take at least eight or nine more years to clear the debt. Today, Renee works as a legal secretary, earning $28,000 a year, which must support both her and her son. In the hopes of boosting her earnings potential, Renee has re-enrolled in school, taking correspondence classes with the aim of becoming a paralegal. When I asked Renee if she wished she could have done anything differently up to this point in her life, she didn't hesitate with her answer: "Number one, I would have finished college. I would have actually gone to a four-year college and had a real degree."

Renee is not alone. This is the story of downscaled dreams.

Soaring tuition costs combined with cuts to financial aid have forced students into massive debt and priced many smart kids out of four-year colleges altogether. Every year, 410,000 college-qualified students -- just like Renee -- from households with incomes less than $50,000 enroll in community college instead of going to a four-year college.(1) Another 168,000 college-qualified students don't enroll in college at all. These students took the SATs, had good grades, and were college-ready. They just didn't have the money. And they weren't willing to play the debt-for-diploma game.

Thirty or forty years ago, skipping college was much less important. While a college degree has always been considered a stepping stone to higher status and greater prosperity, it certainly wasn't expected of everyone. Jobs for high school graduates were plentiful, and many blue-collar workers made good money. Back in the 1970s, an accountant with a B.A. and a steel worker might live on the same block, drive the same cars, eat at the same restaurants, and send their kids to the same public schools. But as the pay difference between high school grads and college grads has widened, so too have the life outcomes. In 1977 there was only a 6 percentage-point difference in home-ownership rates between those with college educations and those without. Today, there is a 20 percentage-point difference. Today the college-haves and the college have-nots live in different worlds.

College: From Nicety to Necessity

Nowadays, entering the real world with only a high school diploma is like going into battle armed with only a squirt gun. Over the last thirty years, earnings for workers with high school diplomas have taken a beating. By 1994, males 25 to 34 without college degrees were earning roughly the same amount as their similarly educated grandfathers earned in 1949.(2) High school students saw the writing on the wall and more began enrolling in college. In 1975, just over half of all high school graduates continued their education after high school. Today, nearly three quarters of high school graduates enroll in some type of college after high school.(3) But those numbers are deceptive. Although young adults may be swarming into college, most are failing to complete their studies. Less than a third of young adults aged 25 to 29 had a bachelor's degree or higher in 2003 -- a percentage that hasn't kept pace with enrollments.(4) The kind of family someone comes from and the amount of money they can pony up exert a heavy influence on whether a student ends up at a two-year or four-year college and whether or not they will complete their degree. Which means that today's bachelor's degree holders are still a rather select group.

During the same time that a B.A. has become the new entry pass to the middle class, tuitions have soared and our federal financial aid system has fossilized. Of the $70 billion a year the federal government spends on student aid, the vast majority is loan-based aid, and in any case it is nowhere near generous enough to help many students pay for college. As a result, nearly two thirds of students graduate with student loan debt, and low-income students are most likely to be borrowing.(5) As this Red Sea of debt has risen, policymakers have dithered. Every four years or so, Congress votes on whether to make changes to the maximum amount a student can borrow or receive in grants to pay for college. During the 1980s and 1990s, grants to low-income students were bumped up a tad and student loans were made available to families regardless of their income. And yet, the amount of money a student can borrow is still the same as it was in 1992. The maximum Pell Grant award, the nation's premier program for helping poor kids pay for college, covers about one third of the costs of a four-year college today. It covered nearly three quarters in the 1970s.(6) But only 22 percent of Pell Grant recipients get the maximum award.(7)--the average award in 2003 was $2,421, which covered only a quarter of the costs of a four-year public college.8 How is it possible that as college has become more important, access to college has become more out of reach?

Perhaps our members of Congress, the majority of whom are Baby Boomers or older, don't remember just how good their generation had it when it came to being able to afford college. For any Baby Boomers reading this book, I'm about to offer you a trip down memory lane. And for young adults, I'm about to show just how badly we've been short-changed.

The Glory Days of Financial Aid

America prides itself on being a nation of unlimited opportunity. Go to school. Go to work. Go to Florida and retire when you're fifty-five. That's the theory, anyway. While European countries rely heavily on taxes to fund social policies that minimize inequality, America has historically looked to education as the great equalizer. I don't know where we're looking now. As more people want to climb the ladder of educational opportunity, we're simultaneously sawing off the rungs.

The vast system of public universities that exists today was the result of purposeful action by the federal government. In 1862, Congress passed the Morrill Act, named for its sponsor, Congressman Justin Morrill of Vermont, which provided federal land to the states to establish public colleges. The goal of these first land-grant colleges -- such as those in Wisconsin, Michigan, Illinois, Indiana, and Minnesota -- was to educate the entire population and produce research to support emerging industries. In 1890, a second Morrill Act provided land to establish the country's first black colleges.

The nation continued to promote higher education throughout the twentieth century, expanding access to college as a way to redress inequality, foster democratic ideals, and spur economic development. The pledge to kick open the doors to college began in earnest with the "GI Bill of Rights." Officially known as the Servicemen's Readjustment Act of 1944, the goal behind the GI Bill was to help millions of returning veterans "readjust" to civilian life and provide them with the education, skills, and money to successfully reintegrate into society and the economy. The GI Bill provided grants to help veterans pay for tuition, books, and health insurance. It also provided a monthly stipend to help college students pay for living expenses. Back in 1948, veterans received a grant of $500 a year -- enough at the time to pay for all but $25 of tuition at Harvard.(9) On top of that, they received a monthly stipend of $50 -- that's $400 in today's dollars. As a point of comparison, in 2003 the average federal grant to students was $2,421, which falls $24,000 short of tuition and fees at Harvard.(10)

The GI Bill was key to building the massive middle class that exists today.(11) The hundreds of thousands of accountants, teachers, scientists, and engineers educated under the GI Bill helped fuel the long economic expansion of the postwar era and as a result changed the social and economic landscape of America. About 8 million veterans took advantage of the GI Bill, and 2.3 million of these attended colleges and universities. By 1960, half of the members of Congress had gone to college on the GI Bill. With the additional benefits of no-down-payment policies and low-interest mortgages, the GI Bill fostered the great exodus to the suburbs and the establishment of a wide middle class that came to symbolize our country's prosperity and the achievement of the American dream. Not a bad payback for a mere $91 billion investment (in today's dollars).

The kids who grew up in this new middle-class security are today's Baby Boomers. Like their fathers (it was mostly men who profited from the GI Bill), Baby Boomers benefited from generous financial aid policies and dirt-cheap tuition at colleges all across the country. But this time around, Baby Boomer women joined the college stampede.

A new law was passed to reaffirm the radical American idea that anyone should be able to go to college -- and be able to pay for it. The Higher Education Act of 1965 (HEA) established the college grants and student loans on which today's system is largely based. Whereas the GI Bill focused on veterans, the HEA sought to ensure access to college for all individuals. As President Lyndon Johnson said when he signed the bill, "The Higher Education Act of 1965 means that a high school senior anywhere in this great land of ours can apply to any college or any university in any of the fifty states and not be turned away because his family is poor."

As a result of this landmark legislation, the number of -low--income students in American colleges and universities nearly doubled between 1965 and 1971.(12) For poor kids, grants were generous enough to cover the cost of going to college. For the middle class, tuition was low enough that most students could foot the bill with Mom and Dad's help and a part-time job.

Back in 1977, the largest high school graduating class in the nation's history, the Baby Boomers born in 1959, was headed for college. Their record numbers, in addition to the slumping economy, made it a particularly bad time to be entering the labor market. The good news, though, was that college was affordable. Average tuition in the late 1970s for a four-year state college was just over $1,900, in 2003 dollars.(13) Add in room and board, and the total cost was just over $6,000. For Boomers of more substantial means and grander expectations, the tuition at a private college was around $8,000, and with room and board the total cost was $12,000, again inflation-adjusted. High school graduates hoping to learn a trade after high school could easily fork over $900 for a year's tuition at a community college.

Borrowing one's way through college just wasn't the norm. In 1977, college students borrowed about $6 billion (2002 dollars) to help pay for college, compared to $28 billion borrowed by students in 1993.(14) By 2003, the amount of borrowing had doubled, to $56 billion. The rise in loan volume cannot be completely explained by increases in college enrollment. The number of students enrolled in college grew by 44 percent between 1977 and 2003, but student loan volume rose by 833 percent. Over the last decade, the average student loan per year rose from $2,713 per student to $4,903, in constant dollars.(15) The older Baby Boomers had it even easier than the younger tail because the 1960s marked the heyday of college affordability and generous financial aid. Both the youngest and oldest of the Baby Boomers (and their parents) made it through college without much financial struggle and certainly without the debt burden Gen Xers have on their shoulders.

The Debt-for-Diploma System

To illustrate how nonexistent student loan debt was for previous generations, I conducted a simple Nexis search. When I typed in the words "student loan debt" for the years 1971 to 1980, the search yielded no articles; not a single article on this subject appeared in any newspaper or magazine in the entire country. The next decade brought only a handful of articles, only sixty-seven about student loan debt between 1981 and 1990, to be exact. It's worth noting that the first articles that appeared, in 1982, were exclusively devoted to the high rate of default on student loans by doctors. It wasn't until 1986 that there was a newspaper article voicing concern about rising student loan debt in general. Continuing the Nexis query, I searched "student loan debt" for the decade 1991 to 2000. The search was interrupted because it would yield more than 1,000 articles. The debt-for-diploma system had arrived.

The debt-for-diploma system is a pernicious beast. It stunts young adults' economic progress as they try to start their lives, draining precious dollars out of their paychecks for more than a decade. The evils of the debt-for-diploma system aren't restricted to those who take out student loans. Anytime a bright but lower-income student settles for a two-year institution or forgoes college altogether, the debt-for-diploma system has claimed another victim.

It shouldn't be surprising, then, that many of the gains made during the 1970s in expanding access to college have disappeared. In fact, the gap in college enrollment among whites, blacks, and Hispanic students has actually widened over the last thirty years: in 2000, the enrollment gap between white and black students was 11 percentage points, up from only 5 percentage points in 1972. The enrollment gap between white and Hispanic students was 13 percentage points in 2000, up from a 5-percentage-point gap in 1972.(16) One result of debt-for-diploma is that the highest-performing students from the lowest socioeconomic backgrounds enroll in college at the same rate as the lowest-performing students from the highest socioeconomic households. To put it more bluntly, the smartest poor kids attend college at the same rate as the dumbest rich kids.